Fintech’s Fraud Problem: Why Some Merchants Are Shunning Digital Bank Cards

Fintech’s Fraud Problem: Why Some Merchants Are Shunning Digital Bank Cards

Fintech, Ach Fraud 101

12/4/2021 7:40:00 AM

Fintech ’s Fraud Problem: Why Some Merchants Are Shunning Digital Bank Cards

I'm a reporter on Forbes' wealth team covering the world's richest people and tracking their fortunes. I was previously an assistant editor for Forbes' Money & Markets section, and I worked for Bloomberg and Pitchbook News before that. I studied history and economics at the University of Virginia, where I also wrote for the student paper and a very secretive underground satire magazine.

at branch locations announcing the ban and over the summer its FAQ singled out “prepaid debit/gift cards and Chime debit/credit cards” as not acceptable for vehicle pick-ups. Avis’ restrictions prompted a backlash from Chime and its card network, Visa, in late summer. Visa has a strict “honor all cards” policy for merchants who generally must accept any Visa card from any issuer. After

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Forbesreached out to Avis for comment, its policy page was updated to remove mention of its Chime restriction. An Avis spokesperson declined to explain the reason for its Chime ban, simply saying that Chime cards are accepted as payment upon returning a rental car, which would still require customers to have a different card for vehicle pick-up. 

Enterprise and Hertz, the two largest rental car agencies in America, have also instituted fintech card bans.Forbesspoke with 10 Hertz storefronts across ten states, and most said cards tied to Chime were not welcome, with Cash App, Paypal or Venmo also rejected by some. An Enterprise customer service rep said locations at airports don’t accept Chime cards either. Some of the non-airport branches called by headtopics.com

Forbessaid they do accept Chime, though they cited various special restrictions such as requiring a utility bill. Nearly half of the dozens of Marriott Courtyard, Holiday Inn, Extended Stay America and La Quinta franchise locationsForbesspoke with said they don’t accept Chime or Cash App cards, either. 

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Chime cards got the cold shoulder last spring at the St. Louis Airport's Avis/Budget rental car location.Image courtesy of Ramy SerageldinSpokespeople for Hertz and Extended Stay America said company-managed locations had banned Chime or Cash App cards, while spokespeople for Marriott and Enterprise claimed the cards are accepted. (Enterprise failed to clarify its airport policy.) The owners of the La Quinta and Holiday Inn brands did not respond to multiple requests for comment by

Forbes.Brian Mullins, Chime’s senior vice president of risk, downplays the problem. “In July, we had 50,000 transactions across all Marriott and Courtyard Marriotts … There may just be some individual locations where [a rejection of Chime cards] had occurred.” Chime had already done $150 million in Enterprise car rental transactions in 2021, he said in late August. “If it's an issue, it's not affecting our customers,” he insisted. 

According to experts, much of the fraud seen by rental car agencies and hotels is so-called first-party fraud, where card holders run schemes under their real identities. One way they can do this involves taking advantage of a quirk in the U.S. payments system, says Mary Ann Miller, a vice president at identity and fraud company Prove. When someone picks up a rental car or checks into a hotel, the merchant processes a pre-authorization charge on their debit or credit card that puts a  “hold” on a set amount of money. That hold expires after a short period of time—say, three days, depending on the terms set by the bank that issued the card. Once it expires, a bad actor, who might have rented the car for a week for example, can spend the money, since it’s no longer locked up. When the rental car agency finally goes to charge the customer after the car is returned, the bank account tied to the debit card is empty or the limit on the credit card is exhausted, and the merchant or bank can’t collect. headtopics.com

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Another fraud tactic is for a customer to dispute large numbers of legitimate charges. Chime says its systems try to weed out serial disputers, but its frictionless interface makes refusing Chime charges as easy as a few taps on its mobile app. “Account takeovers” are another scam that fintechs like Chime are particularly susceptible to, because fraud rings often target new technology, thinking it’s more likely to have holes. In one rip-off, scammers buy information on the dark web to figure out Chime customers’ usernames and passwords, then gain access to their accounts and go on a buying spree. Can’t traditional banks’ accounts be taken over too? Yes, but the digital banks may be both more vulnerable and more likely to be targeted."Digital-focused banks have a target on their backs because fraudsters know that the banks want to make the user signup flow and banking experience as seamless as possible,’’ says Vice President of Trust and Safety Kevin Lee at fraud prevention firm Sift.

Because of Visa’s and Mastercard’s dispute protection policies, merchants hit with various forms of fraud can often escape being held liable for the unauthorized charges themselves. But trying to clean up a rash of illicit activity is costly, involving many hours of research and internal meetings across different corporate teams. 

Chime vigorously denies that its app has become a haven for fraud. Still, part of its problems may stem from the company's aggressive customer acquisition campaigns, often using social media to attract unbanked or underbanked prospects who have little or no credit histories. In September, the company offered cash prizes of up to $1,000 to TikTok users who made videos including the hashtag “ChimeHasYourBack.” Two months later, TikToks sporting the hashtag had collectively garnered 7.3 billion views. 

Chime declinedForbes’request to provide its overall fraud rates, saying only that they’re significantly below the maximum thresholds set by Visa and Nacha, the nonprofit association that runs ACH, the U.S. bank-to-bank payments network. The fintech’s CEO Chris Britt instead blames the merchants for any problems that have developed.  headtopics.com

“I think there's a limited number of merchants that are not applying the industry standard of due diligence before giving consumers access to these rental cars,” he says. He adds that Chime doesn’t run credit checks on its users—it’s the rental car agencies’ job to determine consumers’ creditworthiness.  

Chime isn't the only fintech wrestling with fraud and delinquency problems, and these issues date back to the earliest fintech companies in America. From July through October of 2000, two years after PayPal got off the ground, the company lost $6 million to fraud at a time when its revenue was less than $5 million. PayPal was losing $1,900 an hour to fraud. More recently, phony jobless claims have been a problem for Green Dot and Square’s Cash App, as well as Chime. 

Ten residents of Palm Beach County, Florida were arrested in September for attempting to raid other states’ unemployment benefit coffers. According to court records, the defendants typically opened accounts at Chime, Cash App or Green Dot under their own names, then applied for unemployment checks from states they had neither lived nor worked in. Explaining how to commit the fraud to an unnamed associate, one 21-year-old defendant suggested using the three fintechs for direct deposit of the swindled funds: “States like Arizona and Pennsylvania hittin fasho...FREE GAME,” he wrote in an Instagram message reprinted in court records. “Chime Greendot cash app.” 

Kyle Kinney, a detective at the local Florida police department who investigated the cases, says the offenders likely preferred digital banks for their convenience, compared to brick-and-mortar alternatives. “There's no risk of needing to show identification in person, no surveillance video to show who's utilizing the bank account,” he explains. “Transferring and receiving funds to and from co-conspirators is pretty easy.”

The flood of extra unemployment money tied to the pandemic, as well as the expanded categories of people eligible for payments, has likely exacerbated the problem.  The U.S. Labor Department’s Inspector General recently estimated that, based on an historical mispayment rate of 10%, between March 2020 and September 2021, $87 billion in enhanced benefits could have been improperly paid, with “a significant portion attributable to fraud.” But, the IG added, the actual number—based on a preliminary audit—was likely higher. Frank McKenna, cofounder of fraud prevention firm Point Predictive, suspects that Chime was “one of the preferred ways that a lot of these fraudsters took money from the government, because they could easily go online, set up a Chime account very quickly, have the funds transferred into the account, and then quickly have those funds diverted elsewhere … I think what you're seeing now is the result of a lot of growth, and a lot of the fraud that might have gotten into the portfolio while all the stimulus came in.” He also says that there’s an active market on messaging app Telegram for people to buy Chime accounts. 

“There's no risk of needing to show identification in person, no surveillance video to show who's utilizing the bank account.”-Kyle Kinney, detective at a local Florida police departmentIt's not just the merchants who have become wary of doing business with big fintechs like Chime and Cash App. HMBradley, a three-year-old, Santa Monica-based online bank with $375 million in assets, saw a startling rise in fraud coming from the transfers it gets from Chime and Cash App accounts. The schemers would typically open an HMBradley account, then connect it to an existing Chime account. They’d request to transfer funds from Chime, and when the money reached HMBradley, they’d quickly ferry it into a third bank account. Often, the funds HMBradley was pulling in from Chime didn’t exist—and that’s possible because of the way the U.S. bank-to-bank transfer network, or the Automated Clearing House (ACH) system, works. 

ACH Fraud 101One way people exploit America’s sluggish bank-to-bank money transfer system is pulling funds out before a transaction settles.The ACH network, first built in the 1970s, lacks real-time verification and it can take days for transactions to settle through ACH. So when a neobank allows a customer to pull money from an outside account via ACH, it takes on the risk of finding out several days later that the customer only had $1 in his account even though he requested to transfer $1,000. ACH still underlies most money transfers, to the tune of $62 trillion in 2020, and is run by Nacha, a nonprofit association funded by financial institutions.

While HMBradley typically only sees about $500 worth of fraud per month, in May it lost tens of thousands of dollars, split between Cash App and Chime users, according to CEO Zach Bruhnke. To stop the bleeding, Bruhnke put longer holds on transfers so that a customer trying to pull in funds from a Chime or Cash App account would have to wait a few more days to see the funds arrive in HMBradley. 

Another new online bank called One has also placed longer holds on Chime transactions. “It's a reflection of how frequently the accounts tend to be fraudulent and how much loss tends to be taken on those transactions,” says One CEO Brian Hamilton. Chime CEO Chris Britt again prefers to shift the blame. He says that small companies like HMBradley and One “probably don't have the same level of sophistication in terms of how to process things like ACH transactions and transfers from online accounts.”

Betterment, a robo-investing app with $29 billion in assets, blocked all new connections to Chime, Cash App, Square, Robinhood, Green Dot and Metabank in May due to “a trend of attempted fraudulent activity,” according to an email Betterment sent to some customers that was reviewed by

Forbes.Britt says there are a “number of companies” that Chime “runs much more volume through … that are managing just fine.”According to Bruhnke, Chime’s team was helpful in troubleshooting HMBradley’s fraud spike. Bruhnke tried to work with Cash App to get help, too, but their support was “almost non-existent,” he says. Today, HMBradley no longer puts longer holds on Chime transactions, but for most Cash App customers, he extends HMBradley’s typical two-day hold period for transfers to five business days and caps daily transactions to between $100 and $500. 

Bruhnke says of Square’s rapid customer growth, “They’re a public company, and they’re sort of padding their user numbers by perpetuating this.” Square declined to make an executive available for an interview, but toldForbesvia email that fraud prevention is a top priority and that Cash App maintains teams dedicated to resolving merchant acceptance issues.

Stock trading app Robinhood recently highlighted its own ACH fraud challenges. “Customers initiate deposits into their accounts, make trades on our platform using a short-term extension of credit from us, and then repatriate or reverse the deposits, resulting in a loss to us of the credited amount,” it wrote in its second quarter

regulatory filing. As a result, its provision for credit losses for the first half of the year surged 54% to $37 million. In February, a payments processing company that works with hundreds of merchants that sell age-restricted products like alcohol saw 45% of its fraudulent ACH transactions come from Chime, according to an executive at the payments company. It noticed a pattern where some people had used multiple Chime accounts under slightly different names but with the same IDs. They’d buy alcohol from one merchant, but before the transaction settled, they’d quickly pull the rug out by moving that money into another Chime account, a maneuver made possible by the settlement lags of the ACH system. 

Read more: Forbes »

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Fintech’s Fraud Problem: Why Some Merchants Are Shunning Digital Bank CardsI'm a reporter on Forbes' wealth team covering the world's richest people and tracking their fortunes. I was previously an assistant editor for Forbes' Money & Markets section, and I worked for Bloomberg and Pitchbook News before that. I studied history and economics at the University of Virginia, where I also wrote for the student paper and a very secretive underground satire magazine.

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Fintech’s Fraud Problem: Why Some Merchants Are Shunning Digital Bank CardsI'm a reporter on Forbes' wealth team covering the world's richest people and tracking their fortunes. I was previously an assistant editor for Forbes' Money & Markets section, and I worked for Bloomberg and Pitchbook News before that. I studied history and economics at the University of Virginia, where I also wrote for the student paper and a very secretive underground satire magazine.